Rising Costs of Capital Pressure Global Markets Amid AI Investment Boom

The global cost of capital is rising due to increasing spending on artificial intelligence (AI) infrastructure and higher government borrowing, according to Goldman Sachs. The report states that companies are raising more debt and equity to fund their investments in AI, while governments are borrowing more for infrastructure, energy security, and defense.

Goldman Sachs notes that the two major themes dominating investor discussions, AI and rising interest rates, are becoming increasingly linked as demand for capital rises across both the private and public sectors. The report states that a surge in capex spending to fund AI infrastructure has eaten into free cash flow and forced companies to raise more in debt and equity markets.

The impact is already visible in corporate financing, with capital expenditure by AA-rated issuers rising 65% year-over-year in the second quarter. This marks the 10th consecutive quarter in which aggregate AA capex growth exceeded 35%. Companies have also turned to credit and equity markets to fund their investments, with US convertible bond issuance reaching $135 billion so far this year, with AI-related borrowers accounting for 44% of the total.

Goldman Sachs’ credit team has raised its full-year US investment-grade gross issuance forecast by $200 billion to $2.3 trillion, with AI-related issuers accounting for about a quarter of US investment-grade gross supply this year. The report warns that higher funding costs could put pressure on equities if earnings growth slows.